The research found that about 26 million American adults have no histories with national credit reporting agencies such as Equifax, Experian and TransUnion. In addition to those so-called credit invisibles, an additional 19 million have credit reports that are so limited or out of date that they are unscorable. In other words, 45 million American consumers are living without credit scores.
Blacks and Hispanics were significantly more likely to be without a credit score, the study found, with a 15 percent rate of credit invisibility, compared to 9 percent for whites. Having a low income was another major predictor of whether someone had a credit score: census tract data showed that nearly 30 percent of consumers in low-income neighborhoods were credit invisible and another 15 percent had credit records that could not be scored. In upper-income neighborhoods, just 4 percent of consumers were credit invisible and an additional 5 percent were unscorable.
“When consumers do not have a credit report, or have too little information to have a credit score, the impact on their lives can be profound,” said Richard Cordray, director of the CFPB, in a call announcing the study. “And given that we found that consumers in low-income neighborhoods are more likely to be credit invisible or unscored, this may be limiting opportunities for some of the most economically vulnerable consumers.”
Causes of credit invisibility
Younger adults were much more likely to be credit invisible or not have their credit record scored. More than 80 percent of 18 and 19 year olds were in that category, largely because they had had no time to establish a credit history, and that figure fell below 40 percent for those aged 20 to 24. (Tweet This) After age 60, the incidence of credit invisibility or unscorability rises again. (The increase was not due to stale information, however. The incidence of stale information among the elderly was lower than among consumers aged 25 to 29.)
John Ulzheimer, president of consumer education at Credit Sesame, pointed to two reasons so many young American adults do not have credit scores. First, after the CARD Act passed in 2009, consumers under age 21 had to prove they had a job or a co-signer to get a credit card. The goal was to keep younger consumers from taking on credit card debt they could not repay, he said, “but if you are going to restrict people from getting credit, you are also going to restrict their ability to build a credit report.”
Use of prepaid debit cards are another factor, Ulzheimer said. Many of the problems associated with prepaid debit cards in the past, like fees that were high and not always easy to understand, have diminished, according to a study by The Pew Charitable Trusts. But prepaid card transactions do not help a consumer build a credit history.
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How to rebuild your credit
Consumers have a number of possible ways to build or rebuild a credit history. One thing they can do is obtain a secured credit card. A credit score is not necessary, and using the card to draw on money you deposit with a bank will help you build a credit history.
If you go this route, make sure to choose a card that will report your payment history to all three credit rating agencies, Ulzheimer cautioned. Not all do, and “without reporting to all three, it’s like a tree falling in the woods,” he said, because your credit history will not be known.
Becoming an authorized user on someone else’s card is another option for consumers. College students may do this with a parent’s card, for example. They also establish some credit history when they have a student loan. Even when they are in school and payments are deferred, the loan will show up as part of their credit history, Ulzheimer said.
Another option that is less well-known is to take out a credit builder loan from a credit union. Instead of receiving the loan money upfront, a consumer makes payments into an interest-bearing account for the life of the loan. At the end of that time, the consumer receives the money with any accrued interest.
Whatever you do, make your credit card loan payments on time, and don’t overborrow. The amounts you owe account for 30 percent of your credit score, and your payment history represents another 35 percent, according to FICO, a predictive analytics company that develops credit scores.
Building a credit history will take time and attention, but it can be done. And it’s better than being credit invisible.